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Adam Druit

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Can anyone here defend the use of metal backed currency in this day and age?

I've read several comments on these boards that suggest something akin to the following:
"If only the US would get rid of it's 'paper' (I assume people mean fiat) currency and go back to gold/silver, everything would be better."
What I have yet to see is any defense of this position. Why? Would someone mind helping me to understand why a backed currency is intrinsically better than a fiat one?

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  • May 6 2012: Backed currencies show the actual value of a nation's productive capacity. I wonder why a backed currency can't be created that reflect's a nation's total technological, agricultural, material, geographical, academic, and cultural contributions to the globe as a whole. Couldn't we agree on simpler signifiers of growth based on streamlined subcategories of these market values?
    • May 6 2012: That's an interesting idea, I'm just not sure how it could be created. First, any supernational agency that was tasked with determining all of these categories would have such a huge influence of world trade, I'm not sure that would be much better. Second, I'm not sure we can really agree on those signifiers- what economists value as indicators differs between schools of thought and changes over time (one of the best examples is the shift from GNP to GDP). Third, I don't know how it would actually solve for the issue like those who defend metal backed currencies deem necessary. The nice part of having a nation's currency backed by gold is that, if nothing else, you can turn one amount of that currency into some amount of gold- a commodity that can then be taken anywhere in the world and maintains some value. I'm just not sure how one could actually convert this "advancement backed" currency you propose.

      But a very interesting and unique solution!
      • May 6 2012: Yeah, creating a system like that would be a logistical nightmare...we do have the UN though, and we do have a certain ephemeral international standard of materials value...I guess the biggest problem would be the same thing we're seeing in the whole European Debt crisis...certain countries, value poor, may not wish to get on with the program and allow themselves to be "severely downgraded".
        I suppose too the problem might manifest in an unwillingness to accept aid for additional development; like say if a country were land poor (save for resort-worthy real estate) but culture rich. Also, the nature of supply and demand would probably have to be retooled; emphasizing more the production of necessary goods over that of unnecessary ones. And to top it off, it probably would still benefit big business over main street businesses. Unless the international community encouraged trade collectives (run through the Cloud, maybe?).
        Now all of this is sounding too much like communism. Sorry.
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    May 4 2012: The definition of money is: a symbol backed by confidence.

    This mean that if I give you a piece of paper printed by the U.S. or any other government you will have confidence that you can exchange that paper for goods and services.

    This is not the case in Zimbabwe, the Wiemar province before world war 2, Argentina from 1944 to 2010, etc. This is because the money was not backed by anything.

    In fact in the U.S. Bernanke has been indulging in "Quantitative Easing" which is just printing money without anything backing it. This is going to bring inflation to the U.S. wily nilly.

    The U.S. currency is de facto backed by oil and Chinese investment. But sooner or later this going to come to an end.
    • May 6 2012: I think where we differ in economic reasoning is our definition of money itself. I define it as anything that performs three tasks: acts as a medium of exchange, a store of value, and a unit of account. While confidence is required to perform these three tasks directly, it isn't the real necessity of money.

      But the issue of inflation with fiat currencies brings the worry of deflation in backed currencies. Population growth alone is skyrocketing in recent centuries- we don't have enough new precious metals to make enough new money to keep the money supply per capita constant, let alone have the slow growth of the money supply per capita that often brings economic growth. The solution I see in this backed but growing world is to shift to less valuable, more available metals, but as that becomes the trend, the currency effectively approaches a fiat currency- people don't put the value of the metal in it, they define value based on the government backing it.

      Furthermore, in terms of rapid expansionist policies, there are ways to cut inflation quickly. They're often painful for the economy, but are possible. Which gets to the heart of the beauty of a fiat currency- it allows governments to use monetary policy to exploit relationships like the Phillips Relationship to better grow an economy in the medium run.
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        May 6 2012: You yourself say "they define value based on the government backing it." I'm not opining it is just a fact that money is an idea backed by confidence. In order for any exchange to occur a person has to have confidence in receiving the goods bargained for, money is just one more extension of that.

        The money can equal any amount of a mineral. You might say well then the current value of a U.S. dollar is 1/1642 of an ounce. I'm not saying that having the money backed by gold is the answer but it certainly helps keep inflation in check.

        The money supply does have to be monitored oversupply = Wiemar Province, under-supply = the great depression in the U.S. I wouldn't down play the difficulty in controlling inflation, Nixon and Carter tried for many years without sucess, Argentina for many decades with out sucess. Either malady is equally as bad to this day U.S. citizens say anything but deflation and German citizens say anything but inflation.

        I don't know what the Phillips Relationship is?.
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        May 6 2012: how could confidence not be essential? as a medium of exchange, it is unavoidable that at some point, people have to hold a cash balance. i would not want to hold any cash if i don't trust its future value. store of value is even more obvious. how could it be a store if it does not keep its value?

        deflation being a problem is a myth. during the 1800's in the US, deflation was the norm. exactly for the reason you explained: stuff multiplied, money didn't. and that was the best century ever in the western history economically. so we don't need per capita constant amount of money, we want stable money that can not be created.

        the philips curve is another myth. it does not work, especially not in the long run, but not really in the short run either. it is not observed in real life, and there is no sound theory backing it up.
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    Jun 3 2012: Well believe it or not gold will always be valuable because of its usefulness in space. Golds ability to conduct heat so evenly and its ability to be hammered to a single atom is very valuable. Gold is easily used for so many purposes.

    Also, as long as women like gold and silver it will be valuable.
  • May 18 2012: Metal based currency is a relic of the past. If we really look at what will be valuable in the future, we would have a "water-based" currency. Water is essential to life and in limited supply.
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      Jun 3 2012: good thought but it's difficult to hold water in your pocket. What if you get thirsty?
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    May 9 2012: A backed system you have a limit and not an unlimited debt creation like we are seeing with the fiat systems. It is corrupt and being manipulated to make a few at the top very wealthy. Why else would so man of the top earners be stocking back gold but pushing the fiat system on the lower classes.
  • May 6 2012: Everyone,

    Thank you for taking the time to respond! There are definitely a lot of ideas here that are a great first step- but to try to keep the conversation going, I'll do my best to reply to each set of arguments directly. I don't want to seem aggressive, I just feel it's that next step that I have the hardest time seeing
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    R H 20+

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    May 5 2012: Actually there's a new arguement for currency to based on bars of soap, canned sardines, and toilet paper. Because now our gov'ts and their complicent banks have bankrupted themselves and are now trying to stave off a catastrophic worldwide depression. If they fail, that's all anybody is going to want.
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    May 4 2012: don't know where to start.

    tear one understanding: fiat money is manipulated by the state. its total amount varies in time, and in practice, it always grows. the total amount of rare metals can not be grown by will, so they can be practically treated as constant. do we want the state to be able to determine the amount of new money? do we trust them?

    tear two understanding: keynesian economics claims that creation of new money helps the economy through inflation and lower interest rates. it is not just what they say. all governments actively create new money. new money creation also has another "benefit": the new money ends up where the government wants it to be, namely itself, and its "outlets", the banks. with inflation, the state can spend more without taxation.

    tear three understanding: austrian economics claims that interest rate matters, and stable money helps the economy. stable money allows safer savings, more stable economic calculation of profitability. the interest rate is the price of capital. price should be set by the market. lower price leads to shortages, higher price leads to unsold heaps. if you lower interest rate, that is, the price of capital, too many people will borrow, and too few will save. because of these, the best for the economy to have a fixed amount of money. what it is, does not matter. it can be paper, it can be bits in a computer, it can be gold. but the total amount should be ideally fixed, or change only very very slowly. to date, gold is the only thing that has proven itself stable for long periods of time. that is why it is popular.
    • Jun 4 2012: I do believe that the bigger question is how much do we want the government inside of our economic processes. I do understand what you are saying about a stable money supply and the government not being able to manipulate the inflation rate as much, but what about the flip side of it? Could you imagine what would happen if one day the US decided not to print money in order to pay for Social Security? What if American had to pay a drastic amount more in takes in order to offset the government's inability to print money? Although I am very weary of government involvement in the economy, there is still a flip side to it. Without this fiat system, many countries right now would be facing massive spending cuts simply because they wouldn't be able to afford programs. Greece's austerity measures are a wonderful example. This current system of constantly inflating the money will have dramatic results in the future, but switching would have a large impact now. Furthermore, the idea of a gold-backed economy is less feasible now because of the growing use of gold in technology.
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        Jun 4 2012: think one step ahead, and realize that whatever government spends, you pay for it. if at a certain stage of the economy, a country can not afford a certain level of social security, then it can not have it. there is no magical way out of that. in order to consume something, you have to produce it first.

        government can hide taxation with inflation and borrowing. taxation is visible, borrowing and inflation are not so much. but it does not change the fact that you pay the bill.

        so you say with gold money, the government can't spend more than it takes. i consider that a good thing. an honest thing.
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    May 4 2012: This might just be the cynical homunculi in my head talking, but those that defend "metal backed currency" are the very same ones that stand to benefit from such a procrustean form of currency. The very notion of displaced wealth carries with it a plethora of unseen and altogether pernicious side-effects. In short, the displacement of value necessarily leads to the asymmetrical distribution; in other words, the wealth always gravitates to those who already have it—hence the significance of initial conditions. I say we get rid of currency altogether, it’s not my idea (Marx beat me to it). The most efficient means of doling out wealth is in an egalitarian fashion. Ad reductio absurdum, if metal backed currency IS reinstated, those that have already invested in metals are looking to double—or even triple—there initial investments. It’s a move on behalf of the speculators in the stock market, that is all.